Your credit score is a 3-digit number provided by the CIBIL, which shows your credit history. Whenever you place an application for a loan, lenders fetch your CIBIL score. At this point, many of you may have this question in mind why do lenders check my credit score?
By fetching your credit score, lenders analyze all your repayment history and debts to check your creditworthiness. A strong CIBIL score shows that your finances are in the right order, and you hold a good track record for all your past borrowings. Moreover, it assists you in getting your loan approved at the best interest rates. However, a poor CIBIL score works vice versa and lowers your creditworthiness. Note that the CIBIL score range anywhere between 300 and 900, wherein 750 is considered a good score.
How is the CIBIL score computed?
There are various parameters that build up your credit score, and depending on this is computed –
Your repayment history –
Timely repayment for your last and existing loans impacts your score positively and results in a high credit score. On the other side, any delayed payment lowers your score and can make availing of a loan and credit card tough for you in the future.
Having a strong repayment history always shows that you paid your outstanding dues on time, and this makes lenders trust you even more for your borrowings in the future. As an outcome, the loan application with a strong CIBIL score often receives approval.
While delayed repayments also result in late payment fees and penalties that increase the overall amount to be paid. So, in order to avoid these consequences, you must repay your loan on time. Doing so would assist you in maintaining a strong CIBIL score.
Multiple loan applications –
Applying for loans various times with distinct lenders can result in hard inquiries on your score. This has a negative impact on your score. So, it is always best to check your score before you place an application for a loan. Doing so assists you in getting an idea about your eligibility, and you can hence apply just with the right lenders who match your eligibility criteria. Also, this lowers your loan rejection chances and ensures loan approval.
Kind of loan taken up in the past –
Availing of various loans enhances your DTI (debt to income) ratio, and when there are multiple unsecured loans, it gets viewed negatively. Thus, if you have applied for numerous loans in a short time span or hold multiple credit cards, then it can appear you as a credit-hungry individual and lenders might hesitate to provide you with the loan in such cases.
Write-off can impact your CIBIL score on a massive level. Moreover, current write-offs impact your score more negatively than the older ones. To avoid these impacts, it is best that you check your score before placing an application for a loan. Doing so would endow you with a good idea as to whether your loan application will be accepted.
How to form a CIBIL score?
An individual with zero borrowing records has nil to a negative score. It is not considered to be good because lenders do not have any record of relying on the applicant. Thus, if you want to avail any loan in the upcoming future, in order to eliminate any hassles, you must ensure to build a credit history. Here are the steps to form a credit record –
Place an application for a credit card –
Applying for a credit card and then using it can help create a credit score. However, before you go for it, remember that credit cards come with high finance charges. Thus timely repayment of the dues in full is the only solution to avoid such heavy finance charges.
May avail a small amount through a personal loan –
Availing of a small loan amount through a personal loan can assist you in forming a credit report on your own. However, to move your credit score towards a positive end, you require making timely repayments. Moreover, you can opt for closing your loan account by prepaying because the interest rate charged in the case of unsecured loans is high. Besides these, it is crucial to keep a check on your score once every 6 months. Doing so will assist you in correcting your errors and any incorrect reporting in your credit report. In the case you view any mistake or discrepancy in your CIBIL report, ensure to connect with the concerned lender and bureau for instant rectification. An instant rectification can increase your credit score.
Other crucial facts you must know –
Investment info – Your CIBIL report doesn’t consider any transactions that have taken place with respect to your investment and savings account. It just talks about the debt activities and credit history that you have.
Credit status – Your credit status is determined by your CIBIL report. However, CIBIL will not let you know for what purpose you can use your scores. For instance, your credit score can be used for credit assessment or somewhere else, but the final decision about loan disbursement lies with the lending banks.
Distinct scores from the respective agencies – Credit scores calculated by CIBIL and other 3 credit bureaus – Equifax, Experian and CRIF High Mark, are not always the same. It is because every credit bureau uses its own formula and scoring model to compute credit scores. The next reason why your score differs from the generated credit score by the other bureaus is the credit info from distinct banks is reported to the credit bureau on distinct days.
Ameliorating your credit score – To improve your credit score, you must ensure to make your credit dues repayment in full on time, maintain a balanced asset mix, maintain a credit utilization ratio (CUR) of within 30 per cent etc.
Settlements – Settlement of your outstanding debts may have a bad impact on your credit score. Thus, ensure to use only the amount through your credit card that you can repay in full by the due date. Avoid spending more than your repayment capacity.